Shareholder Payments: New Rules

Effective January 1, 2012, the financial tests that a corporation must meet before lawfully making payments to shareholders have been simplified. Previously, payments to shareholders were permissible under either a retained earnings test or an unnecessarily complicated and rigid balance sheet-liquidity test. Running afoul of the financial tests causes considerable angst because directors approving the payments as well as shareholders receiving the payments could have personal liability–ultimately to corporate creditors– for the prohibited payments. The new law maintains the retained earnings test, but replaces the complicated balance sheet-liquidity test with a simpler net asset value test and allows a board of directors to base its decision on certain financial statements, a fair valuation or other reasonable methods. Please contact our business service attorneys for additional information concerning the new law.